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Rosey - Investing for deflation

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July 09, 2010 – Comments (2)

There is something in this post by "Rosey" that really got my attention.  Further down in the article he says:

Trading for my parents is a small part of their wealth management because I believe the following is the most important:

If you have wealth now, your wealth will explode in the future not by growing it, but by keeping it while all most everyone else loses theirs. We've already seen this happen the past few years. That's a sad thought, but the majority of people aren't going to believe we are already in deflation until we hit bottom and they are broke. That's just human nature. When I told family, friends and clients in 2003-2005 to unload real estate and buy gold, they all thought I was institutionally crazy.

Under our deflationary model there's a concept I keep preaching: Get as much money out of the financial system as possible. At the bottom of deflation, when the biggest deals on stocks and real estate are available, you won't be able to go to the bank, broker, or insurance company and get all of your money out. The system will be so broken, the bank will have to ration deposits to clients. This doesn't even consider the risk that you might actually lose money inside the financial system. Thought: How many insurance annuities have used investor money to make commercial real estate loans? We have no idea the risk in annuity portfolios, because they are not regulated like banks.

We have and are continually moving money outside of the financial system. First, I have recommended they own a modestly (very modest) valued home free and clear, with no debt. No debt means you actually own it with no ties to a lender, and that's wealth outside of the financial system. Obviously, the physical ownership of gold and silver bars is a part of this strategy. We also house our metals in a vault off-site, and that's money outside the financial system.

Yesterday I blogged on the monetary base having been doubled, but I also stated an expectation of some deflation because of the credit expansion of the monetary system through leverage which is now unwinding.

I believe without the government support to recapitalize the bank we would have already seen a liquidity crisis of the kind that you may have your money in the bank, but the banks are reserving their right to dole it out to you at their pace.  I remember in my youth working in the bank there was a clause in the opening account statement that the banks had a right to have several days written notice to withdraw funds.  And I remember the bank manager saying the clause was left over from the days when there were bank runs in the 30s.

In any event, a bank is not a magic black box.  They gave people's money to other people who did not have a hope of repaying it and it means they gave away responsible people's money, most likely the people reading this.  The deposit insurance is long bankrupt already.  I forget the details of the percent it had in reserves, but it was a pittance in comparison to the amount of money bankers gave to people who had no way to pay it back, (no offense to bankers who remained prudent.)

I wrote to Mr Rosendahl yesterday asking him if he still felt the same when you consider the degree to which Bernanke expanded the monetary base, and I await a reply.

My feelings, as much as it leaves the taste vomit in mouth that bankers who were responsible for the banks that gave these loans still have jobs, and worse, are still getting bonuses, and the banks did not go under and the shareholders of the banks and companies involved did not get wiped out, the actual recapitalization of the banks was necessary, imho.  It is also totally rubbish that taxpayers have been put on the hook for future losses.  The rules of who loses were changed and that was very wrong.

The degree of credit deleveraging still means a number of banks are still in trouble and in this world of gross favortism it is very possible that if you have too much money in the wrong bank, you will lose your money over the insured amount.  This should happen at all banks, but the "bailout" favored some banks over others.

I think that people that qualify for loans under the same criteria that was used prior to this century will still be able to get loans.  Maybe qualifying will be tougher because banks will not be able to afford the normal level of losses when they are still dealing with the massive overhang of the existing defaults.  In this respect, there will be less buyers which tends to push prices down.  

I completely shared the concerns about not being able to get your own money out of a bank because of the gross losses, however, the doubling of the monetary base has massively calmed those fear for me.  I tend to think the deleveraging left will be painful for those caught in the middle of it, it will continue to hurt the employment market and cause problems, but I also tend to think the problems are manageable for the economy to deal with.  I don't see a good economy.

As for "inflation" in the sense of price increases as opposed to expansion of the monetary system, it is time to call a spade a spade.  We have seen price increases far beyond the CPI for years and we have seen our buying power eroded.  I am not going to go looking for data, but it seems to me that prices have gone up relative to the money supply and some of that money supply was from credit expansion.  Like I said in my last post, price corrections relative the gross imbalance of how the credit expansion played out are going to be happening for some time, but I think a lot of price increases relative to the actual monetary base are already here and we are already paying those higher prices.  I tend to think inflation fears will only come true if the monetary base is grossly leveraged again.

I will be looking forward to Mr Rosendahl's thoughts on this now that I have clarified my own thoughts.

2 Comments – Post Your Own

#1) On July 09, 2010 at 3:28 PM, dwot (77.77) wrote:

Here is Rosey's latest post and he brings up a point about how home prices will be pushed down that I have not seen before.

Basically,  when the top end buys stop buying, it pushed top end homes down, which then pushes the prices of the rest down.  It makes sense to me.

Also note he refers to declining home prices as the deflationary trend.  I notice a lot of people seem to exclude that when home prices were going up way faster then everything else it was a type of hyperinflation and now it is a deflation.  The credit expansion did not hit everything equally all at once.

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#2) On July 09, 2010 at 3:36 PM, soycapital (< 20) wrote:

dwot, thank you for the post and link. So how do we invest for deflation? I do not know myself.

Thanks,

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